American Electric Power Company, Inc. (AEP) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the American Electric Power Second Quarter 2023 Conference Call. [Operator Instructions] This call is being recorded. I'd now like to turn the conference over to our host, Vice President of Investor Relations, Ms. Darcy Reese. Please go ahead.

Thank you, Brad. Good morning, everyone, and welcome to the Second Quarter 2023 Earnings Call for American Electric Power. We appreciate you taking time today to join us. Our earnings release, presentation slides and related financial information are available on our website at aep.com. Today, we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors. Joining me this morning for opening remarks are Julia Sloat, our President and Chief Executive Officer; and Ann Kelly, our Chief Financial Officer. We will take your questions following their remarks. I will now turn the call over to Julie.

Thanks, Darcy. Welcome, everyone, to American Electric Power's Second Quarter 2023 Earnings Call. It's good to be with everyone this morning. It's a rapid time of change in our industry with new opportunities resulting from federal policy shifts and evolving state and customer priorities. We also continue to navigate a dynamic environment with rising interest rates and supply chain constraints. In short, it's definitely an exciting time to be at AEP as we make significant progress on our important stakeholder commitments and strategic objectives including delivering on our 2023 operating earnings guidance and 6% to 7% annual operating earnings growth, providing dividend growth in line with earnings, strengthening our balance sheet as we move through the next few quarters, actively managing our portfolio, achieving net-zero by 2045 and central to our purpose, keeping our customer rates affordable. We recently made some organizational adjustments such as the restructuring of our federal affairs function, the realignment of our regulatory team and the refreshment of some of our operating company presidents. These changes will help us to operate more effectively and facilitate our success in this ever-changing environment. As always, we keep the customer at the center of every decision we make. This is why we engage with our federal and state regulators, so we know how to best support our operating companies while we balance investor preferences as we grow the business and invest $40 billion over the next 5 years in new generation resources and our energy delivery infrastructure. This morning, I'll provide a brief overview of our second quarter financial performance before getting into our measured and disciplined approach to simplifying and derisking our business profile through our portfolio management activities. Related to this, I'll share some updates regarding our unregulated contractor renewables portfolio, retail and distributed resources businesses and the status of our strategic review of our noncore transmission joint ventures. While we still have a lot of work to do on the regulatory front, I'll conclude by providing insight into the recent successes related to our renewables execution and development on our regulatory and legislative initiatives as we keep our customers' needs top of mind. A summary of our second quarter 2023 business highlights and a high-level overview of our financial results can be found on Slide 6 of today's presentation. AEP delivered second quarter 2023 operating earnings of $1.13 per share or $582 million compared to $1.20 per share or $618 million last year. The year-over-year decline reflects the timing of higher interest rates and the reversal of last year's second quarter 2022 favorable weather. Today, we're pleased to reaffirm our 2023 full year operating earnings guidance range of $5.19 to $5.39 with a $5.29 midpoint and long-term earnings growth rate of 6% to 7%. Given our line of sight at this point in the year, I believe we have the operational flexibility and levers to pull to ensure that we will deliver on our commitments. Later on, Ann is going to talk or walk through our second quarter 2023 performance drivers and share some perspectives on our load outlook as we drive economic development within our service territory. She'll also share some details supporting our targeted 14% to 15% FFO to debt range. While our FFO to debt is 11.1% this quarter, our forecast show material improvement in this metric as we approach year-end, and we fully expect to be in our targeted range in early 2024. As we continue to execute on our strategic objectives, we remain focused on simplifying and derisking our business profile. To that end, you'll recall that in February of this year, we announced the signed agreement with IRG Acquisition Holdings for the sale of our 1,365 megawatt unregulated renewables portfolio. A summary of the renewable sale can be found on Slide 7. In the second quarter, we received FERC 203 approval and clearance from antitrust authorities. The only remaining approval is from the committee on foreign investment in the U.S., which we expect to receive in the near term and subsequently closed on the sale in August. As we've said, the proceeds from this transaction will be directed to our core regulated businesses and strengthening of our balance sheet. Turning to Slide 8. Let's touch on some other asset sales that we have in progress. In May 2023, we also announced the sale of our New Mexico Renewable Development solar portfolio, also known as NMRD. We are currently on track with our 50/50 joint venture partner, PNM Resources to close on this transaction by the end of 2023. The sales of our retail and distributed resources businesses are also on schedule to close in the first half of 2024, as previously announced. Please keep in mind that other than the unregulated renewables portfolio proceeds of $1.2 billion, no other sales proceeds are reflected in our 5-year cash flow outlook. We will first obtain the signed sales agreements for NMRD and our retail and distributed resources businesses and then incorporate the related proceeds into our cash flow outlook. As part of our commitment to portfolio management, I'm pleased to share some additional news with you today. We're announcing that we've completed the strategic review of 2 of our 3 noncore transmission joint ventures and have determined that the sale of AEP's interest in Prairie Wind Transmission and Pioneer Transmission is our preferred path forward. We expect to launch the sales processes soon, and we'll keep you updated on our progress. In the meantime, we continue our strategic review of Transource Energy and expect to complete that review by year-end. Now let's switch gears to AEP's regulated renewables execution and recent successes. Through our 5-year $8.6 billion regulated renewables capital plan, we now have a total of $5.2 billion approved and an additional $1.7 billion currently before our commissions for approval. You can find more detail on activities to acquire additional generation resources in the appendix on Slides 31 through 33. In May 2023, the Oklahoma Commission approved PSO's 995.5-megawatt renewables portfolio for $2.5 billion, which includes 3 wind and 3 solar projects. These projects are projected to be in service towards the end of 2025. For SWEPCO's 999 megawatt renewables portfolio totaling $2.2 billion of investments. I'm happy to report that last month, both the Arkansas and Louisiana Commissions approved the full portfolio containing 2 wind projects and 1 solar project. We expect the projects will be going into service by the 2025 timeframe. Since the Texas Commission denied SWEPCO's application related to these projects, Arkansas will move forward with the 20% of the portfolio total and Louisiana will flex up with 70%, giving FERC wholesale customers the remaining 10%. We're excited to deliver the benefits of lowest reasonable cost and reliable energy to these communities we serve in Arkansas and Louisiana. We're also currently waiting for commission decisions expected as early as in the third quarter of 2023 for 151 megawatts of owned wind and energy storage at APCo, 469 megawatts of owned solar at I&M and 154 megawatts of owned wind at PSO. Importantly, our regulated renewables goals are aligned and supported by our integrated resources plans. Accordingly, we've issued a request for proposals for generation resources at APCo and I&M with more to come from operating companies soon. I'll turn now to updates on several of our ongoing regulatory and legislative initiatives. More detail on our regulatory activities can be found in the appendix on Slides 34 through 36. We are unquestionably focused on closing the gap between our authorized versus earned ROEs. While our second quarter ROE came in at 8.6%, this measure was depressed by 40 basis points due to mild weather. Closing this gap is going to take a little longer than we had anticipated in our 2023 guidance, which you may recall included a 9.4% ROE, but I'm confident that we'll reduce this gap by year-end and still meet our earnings guidance. As we make needed progress in this regard, we are continuing to prioritize federal, state and customer preferences to meet the needs of our communities that we serve. We look forward to building on our constructive relationships with all of our stakeholders and clearing the path for our operating companies to be effective and successful in their respective service territories. In fact, while being mindful of any ex parte restrictions, I'm personally meeting with many commissioners across AEP's footprint to engage in discussions about our company and what is top of mind for them in the way of priorities and expectations as we work together to do our best to provide this product that is the fundamental enabler for society. In June 2023, we filed a new base case in Kentucky to address the financial health of the company and establish a path for future investment. The application incorporated a comprehensive rate review and a proposed 9.9% ROE with a request to allow for the securitization of $471 million of regulatory assets. This will help to ensure that Kentucky Power is best positioned to provide safe and reliable service while managing costs to provide affordable service to our customers. We expect that the new rates will be in effect in early 2024. In May 2023, we settled PSO's base case with the commission staff, Attorney General and other parties in Oklahoma, providing a path for approval for more efficient cost recovery mechanisms with continuation of the transmission tracker and reestablishment of a distribution tracker. While we await a commission decision expected in the third quarter of 2023, we implemented interim rates starting in early June. For APCo, Virginia's 2020 to 2022 Triennial filed in March of 2023, we're working through regulatory -- the regulatory calendar and expect an order later this year. In Texas, legislation was passed last month, which permits utilities to file the Distribution Cost Recovery Factor, or DCRF, twice per year instead of once per year. The bill also allows DCRF to be used by a utility even if it has a pending base case review proceeding. This important legislation will help improve AEP's regulatory lag in Texas as we make needed distribution investments to bolster the grid in this region. AEP's management of fuel cost recovery remains a top priority with a deferred fuel balance at $1.4 billion as of the second quarter 2023. We've adapted fuel cost recovery mechanisms across most of our jurisdictions with a focus on balancing customer impacts. Notably, we are awaiting a decision on our fuel case in West Virginia. Through this spring, we were active at the state legislature and collaborated on a new securitization bill to provide an effective path forward on fuel recovery and other legacy costs while mitigating customer bill impacts. In April 2023 fuel recovery application, we filed 2 options for consideration, one which amortizes the fuel balance over 3 years and alternatively, in an effort to even further minimize cost impacts to customers. We requested West Virginia Commission approval to use securitization to manage our $553 million deferred fuel balance. We also proposed an opportunity within that second option to apply the securitization mechanism to $88 million of deferred storm costs and $1.2 billion of legacy coal plant balances with the intention of offering a solution that would essentially have a neutral impact on customer rates. Keep in mind, securitization is the mechanism we can use to address affordability in West Virginia. While it's important that we address fuel and storm cost recovery in the state, let me be clear that the possible securitization of $1.2 billion for our Amos and Mountaineer coal plant balances is not required to hit our credit metrics nor does it suggest that there's a change in our current plant retirement schedule at 2040 for these units, whether this is entirely driven by the desire to consider all options to mitigate impact to customer bills. The West Virginia Commission subsequently issued a procedural schedule in the fuel case, including the April 2023 prudency report, which will be addressed in an evidentiary hearing beginning on September 5. This schedule provides an opportunity to ensure focus on cost concerns in a constructive future in West Virginia, balancing customer and financial impacts. Pending the commission's decision later this year, we could issue bonds to securitize a possible combination of the deferred fuel balance, deferred storm costs and legacy coal plant balances in the first half of 2024. I'm pleased with the progress we've made so far. We still have a lot of work to do as we execute on our plans to meet our commitments, overcome challenges, reach our strategic objectives, engage with stakeholders and keep customers a top priority. Together, we deliver safe, clean, reliable and affordable energy to our communities while creating value for our investors. With that, Ann will now walk you through our second quarter 2023 performance drivers and details supporting our financial targets. Ann?

Thank you, Julie and Darcy. It's good to be with you all this morning. Thanks for dialing in. I'm going to walk us through our second quarter and year-to-date results, share some updates on our service territory load and finish with commentary on credit metrics and liquidity as well as some thoughts on our guidance, financial targets and portfolio management activities underway. Let's go to Slide 9, which shows the comparison of GAAP to operating earnings. GAAP earnings for the second quarter were $1.01 per share compared to $1.02 per share in 2022. Year-to-date GAAP earnings through June were $1.78 per share compared to $2.43 per share in 2022. In our year-to-date comparison of GAAP to operating earnings, we have reflected the expected loss on the sale of the contracted renewables business as a nonoperating cost as well as an adjustment to true-up costs related to the terminated Kentucky transaction, in addition to our typical mark-to-market adjustments. Also, due to new legislation in Texas allowing the recovery of incentive compensation, a favorable entry was booked in the second quarter to capitalize previously incurred costs, which was almost entirely reflected as nonoperating earnings. There is a detailed reconciliation of GAAP to operating earnings on Pages 16 and 17 of the presentation today. So let's walk through our quarterly operating earnings performance by segment on Slide 10. Operating earnings for the second quarter totaled $1.13 per share or $582 million, compared to $1.20 per share or $618 million in 2022. The lower performance compared to last year was primarily driven by weather, interest and O&M, partially offset by rate increases in our utilities and transmission revenue growth in both our utilities and the Transmission Holding Company segment. The unfavorable weather was largely due to positive weather we saw in the second quarter of 2022. While weather was mild beginning in the second quarter of 2023, and the unfavorable impact was less significant in comparison to the first quarter of this year. Interest continues to be unfavorable versus the prior year, and that is primarily driven by higher debt balances as well as the higher interest rates. The higher debt balance also has resulted in an increase in interest expense as compared to our guidance, but we continue to adjust in other areas to offset this impact. Again, we were expecting this variance to be more pronounced in the first half of 2023 as interest rates have somewhat stabilized. We also expect the announced sale of our contracted renewables business to close this quarter and the conversion of the $850 million equity units in August to lessen the burden in the second half of the year. Finally, I'd like to note as well that we still expect to see favorable O&M in the second half of the year compared to the prior year. Reflecting the timing of O&M spending and near-term actions that we are taking to help offset the unfavorable weather, such as holding positions open, reducing travel and adjusting the timing and of discretionary spending. These actions are in addition to our ongoing efficiency efforts that we target to offset the impact of inflation each year. Operating earnings for our vertically integrated utilities were $0.51 per share, down $0.08. Favorable drivers included rate changes across multiple jurisdictions, depreciation and office on sales. These items were more than offset by the unfavorable weather, interest expense, O&M and lower retail and wholesale loads. I will touch on our retail load trends in a couple of minutes. Consistent with our first quarter results, depreciation is favorable at the vertically integrated utility segment, primarily due to the expiration of the Rockport Unit 2 lease in December of 2022. I&M should continue to see about $0.055 of net favorable depreciation in each of the first 3 quarters of 2023, plus an additional $0.035 in Q4. Including the impact of the Rockport lease, depreciation was $0.04 favorable in Q2. However, if we exclude the impact of the lease, depreciation would have been about $0.02 unfavorable, which is consistent with the incremental investment in this segment. I also want to mention that the favorable op system sales showing up again in the second quarter is due to the fact that Rockport Unit 2 margins are no longer shared with our retail customers. The Transmission & Distribution Utilities segment earned $0.30 per share, down $0.02 compared to last year. Favorable drivers in this segment, including transmission revenue and rate changes largely due to the distribution investment rider in Ohio and the distribution cost recovery factor rider in Texas. Offsetting these favorable items were unfavorable weather, lower retail loads, depreciation, O&M and interest. The AEP Transmission Holdco segment contributed $0.38 per share, up $0.11 compared to last year. The main drivers here include favorable investment growth and a favorable year-over-year change in the true-up. You'll recall that we had a negative true-up in 2022. Generation & Marketing produced $0.13 per share, down $0.05 from last year. The negative variance is primarily due to the development asset sale and other onetime favorable items in 2022 as well as higher interest expense in 2023. These unfavorable items were partially offset by higher retail power margins in 2023. Finally, Corporate and Other was down $0.03 per share, driven primarily by higher interest expense in O&M. These unfavorable items were partially offset by a favorable change in investment gain and income taxes. The favorable change in investment gain is primarily due to an investment loss incurred in the second quarter of 2022. Before we move on to the next slide to give an update on load, I want to briefly mention that the details of our year-to-date operating earnings performance will be shown in the appendix of supplemental information going forward. You can find these details on Slide 15 of the presentation today. Turning to Slide 11, I'll provide an update on our normalized load performance for the quarter. Overall load continues to come in ahead of budget, but we are closely monitoring key components of our retail sales in the context of slowing economy, and we are seeing different trends between our retail customer classes. As we discussed last quarter, our projections already assume that economic conditions will slow in the second half of the year. Recent positive economic data on inflation supports that any slowdown will be in line with our previous expectations. Beginning in the upper left-hand quadrant of the slide, we see a slowing in our residential load compared to a year ago. Our residential customer counts continue to grow, but we are seeing usage decline as many of our customers return to the office and even more are squeezed by the relationship between inflation and income growth. That relationship is a key driver of residential usage, and we expect to see it stabilize in the second half of the year. This month's CPI data point was an encouraging sign that inflationary pressures on our residential customers are continuing to lessen into the fall. Moving to the lower left-hand quadrant of the slide, we can see a noticeable slowing in the industrial class. Though still ahead of year-end budget projections, industrial load is beginning to reflect the expected slowdown in the outlook for manufacturing across the country. This slowing has been broad-based across industries and operating companies but would have been even worse without our ongoing commitment to economic development. We estimate that total industrial load for the quarter would have actually declined by 1.2%, if not for growth tied to our economic development efforts. Even with these efforts, however, we do expect industrial load growth to remain subdued due to the tighter financial conditions and selling levels of demand for finished goods through the end of the year. Offsetting this slowing is a significant boost to our normalized commercial sales that you can see in the upper right corner. Driven by new large customer volumes from our ongoing economic development efforts year-to-date commercial load has grown almost 8% year-over-year in each of the last 2 quarters. We expect our commercial load to continue to outperform through the end of the year, thanks to ongoing technology development across our operating footprint. Gains in AEP Texas and AEP Ohio should continue to be especially robust with several new projects scheduled to come online through the end of the year. The June CPI data, we've now seen a material deceleration in key components of inflation that the economy has been waiting to see. We think this progress on inflation coupled with continued resilience in the labor market, dramatically reduces the probability of a severe economic contraction in 2023. Our near and long-term load projections are bolstered by our disciplined commitment to economic development across the service area. We know that working with local stakeholders to attract more economic activity is a key strategy to providing value to our customers. This allows us to continue to prioritize investments that will improve customer experience while mitigating the rate impacts on our customer base. Great examples of our recent successes are Enel in Tulsa and GM and Samsung in Indiana. Both of these economic development wins will not only add load to our Industrial segment but each is also expected to bring more than 1,000 full-time jobs that will ultimately benefit our residential segment and boost the local economy. Let's move on to Slide 12 to discuss the company's capitalization and liquidity position. Taking a look at the upper left quadrant on the page, you can see our FFO to debt metric stands at 11.1%, which is a decrease of 30 basis points from last quarter and continues to be below our target. The primary reason for this decrease is a $1.3 billion increase in debt during the quarter, partially due to long-term debt issuances at the operating company level to support our capital investments. And the return of mark-to-market collateral positions associated with the decline in natural gas and power prices. Return of collateral reduces our funds from operations to hits us on both sides of the equation. Without the fluctuations in our mark-to-market collateral positions over the past 12 months and some remaining impact of deferred fuel, our asset loaded debt metric will be closer to 13.7%. We expect that this metric will improve by year-end as we reduce debt after the close of the announced renewable sales and our 2020 equity unit conversion. And we see the improvement in funds from operations over prior year in the fourth quarter. We remain committed to our targeted FFO to debt range of 14% to 15%, and we expect material improvement by the end of 2023 and to achieve our target in early 2024. You can see our liquidity summary in the lower left quadrant of the slide, our 5-year $4 billion bank revolver and 2-year $1 billion revolving credit facility to support our liquidity position, which remains strong at $3.1 billion. On a GAAP basis, our debt-to-capital ratio increased from the prior quarter by 50 basis points to 64.6%. We plan to reduce this percentage in the third quarter as we eliminate debt when we close our announced contracted renewable sales transaction and complete our previously planned equity unit conversion. On the qualified pension front, our funding status increased during the quarter to 102.2%. The funded status improved due to rising rates during the quarter that decreased the liability while solid equity returns positively impacted plan assets. Let's go to Slide 13 for a quick recap of today's message. The unfavorable change in weather, primarily due to positive effects seen in the second quarter of 2022 is a significant driver in our quarter-over-quarter earnings comparison. If we remove this effect, we would have been $0.05 favorable compared to the prior year, and our results were roughly in line with our expectations for the company as a whole. I will note, from a year-to-date perspective, 2023 weather has been the most mild on record for the AEP system in the past 30 years, resulting in $0.29 EPS impact year-over-year and about $0.20 versus normal weather. So as we progress through the remainder of the year, we will continue to focus on taking actions to mitigate this and other headwinds. Overall, our business remains in a strong position, and we are reaffirming our operating earnings guidance of $5.19 to $5.39 per share. We also continue to be committed to our long-term growth rate of 6% to 7%. As Julie previously addressed, we are on track to close the sale of our unregulated contracted renewables portfolio in the third quarter this year and our retail and distributed resources business in the first half of 2024. We've concluded that the sale of our interest in 2 of our transmission joint ventures, Prairie Wind Transmission, and Pioneer Transmission is our preferred path, and we continue a strategic review of our Transource Energy joint venture. These initiatives will help simplify and derisk our business going forward. We really appreciate your time and attention today. And with that, I'm going to ask Brad to open the call so we can hear what's on your mind and answer any questions that you have.

[Operator Instructions] I guess there's someone here. Shahriar Pourreza with Guggenheim Securities.

Just on the credit metrics, obviously, a little bit more slippage this quarter, which you highlighted. I guess, can you talk about the pathway to get to that 14% to 15%, a little bit more detail, I think 300 basis points seems like a lot of improvement that's needed in the short timeframe being that it's your early '24 target. I mean could we see incremental equity in plan as the asset tails enough to get you there? And how important is collecting the unrecovered fuel balance in terms of being able to hit that target, which I guess, still stands around $1.4 billion.

Yes. Sure. I'll take that. As we mentioned, the main impact to our FFO to debt is the timing of the collateral payments. So that's about a 240 basis point impact to our FFO to debt. And so that should resolve itself by the year-end and result in a noticeable improvement. We also have about 100 basis points of favorable impact from the proceeds of the transacted renewable sale and the equity unit conversion. So we are confident that we are going to have metal improvement by the end of the year and be into the range by next year. In our forecast, we don't have any of the securitization in our cash flows. We do have recovery of deferred fuel, but that is not necessary to be able to get into our current range.

Got it. Okay. Perfect. And then maybe just more of a strategic question for Julie. Obviously, AEP is never CapEx constrained, right? I guess, how do we sort of think about overall financing, especially given the current interest rate environment and kind of where the stock currently trades, do you have ongoing -- you do have ongoing needs, right? So as we're thinking about parent leverage and equity. Are more noncore asset sales out there? Or could we actually start to see some more core assets sales to kind of fund the plan and maybe further simplify the story.

Yes. No, Shar, I appreciate the question. And you're right, we have a lot of opportunity to put capital to work as it relates to taking care of the customer and delivering reliable, affordable service. But as you point out, we need to make sure that we're hitting all the metrics, too. So not only do you need to be really mindful of where customer rates are going when we put money to work. I need to make sure that all my earnings growth targets are going to be hit because I think you guys would be upset with me if that didn't happen. So we'll make sure that happens. But I also need to make sure that my balance sheet is really strong, too. So let me get to your question around assets sales. We've really been focused on, as you know, the noncore related activities that when people buy AEP shares or invest in our bonds are not necessarily looking to buy something that is not a traditional regulated utility type business. So to that end, that's why you see us kind of going through the paces today where we've talked about the unregulated components of our business. And while we love transmission, even looking at some of these transmission investments to the joint ventures that are off our footprint. Because if we can channel all of our efforts in dollars to taking care of our customers that are regulated in our footprint, that's where we want to play. So I wouldn't anticipate significant additional activity coming from us for a couple of reasons. I think we're pretty cleaned up once we get some of this noncore stuff taken care of. I think we're in a good place. I think that there may be some opportunities on the edges. But for the most part, we should be in a really good space to be continuing to look at the regulated pieces of our business. But we also -- and very candid, Shar, we don't need to engage in asset sales to make the balance sheet work. What we need to do is make sure we're being as efficient as possible. And that's another reason why I want to make sure that every dollar, we do put to work is one that, a, makes sense for our customers but also is something that makes sense for our service territories. And specifically, why I'm calling that out is the another reason why I'm out talking with folks in our communities. So whether it's commissioners, customers, et cetera, need to make sure that we're aligned or at least absolutely aware of one another priorities and then we can make refinements based on those conversations. So I would never say that we're not at all capital constrained. Because I think we naturally are because we put our own constraints on because we got to take care of customer rates and make sure that we're going to have a really strong balance sheet. We're working on that. As Ann just mentioned, we expect that FFO to debt to look a lot better once we get to year-end and going into 2024. I think in the interim here, it's going to be just a little bumpy as we work through a couple of the next few months. So we'd be too concerned about that. I feel comfortable with the numbers I'm seeing but we'll continue to be very disciplined around which dollars we put to work where that it's consistent with what our stakeholders need and want, taking care of our customer and then just being as efficient as we can. So my focus is going to be more at this point on, let's close that gap on the ROE. That's the piece that I can try to do my best to control.

Got it. Terrific. And then -- no, it does. And we do appreciate some of the salient points you brought up in your prepared remarks as far as the outreach to the regulatory folks and various stakeholders. So thank you for those points.

Yes. Thank you for the coverage.

And next, we go to Jeremy Tonet with JPMorgan.

I want to kind of follow up on some of the points that you were just touching on here because some of the dockets in local media attention have highlighted some regulatory pushback in certain areas of late. And you mentioned reaching out to local commissioners to build relations there. Just wondering over what timeframe you expect to kind of meet all of them. Is this a change in regulatory strategy where they hear from headquarters more regularly here. Just wondering how you think about this type of outreach going forward?

Jeremy, I love that question. So I'm going to tell you from my perspective, this is coming from a former operating company president. So I keep that hat kind of in the back pocket that I got to throw on from time to time. And so let me start with this, what my hope to do -- what I hope to do or achieve is pave the way or clear the path for our operating companies so that they can do the best they can do, boots on the ground. And so my objective is to get out to make sure that I'm talking with different commissioners. And by the way, that's already underway. So I've already been out talking with several folks, and I've got my calendar lined up over the next few months to continue to that effort. So I'm not going to get into necessarily exactly who I'm talking to when, but that's well underway. So rest assured that's happening. But I just -- I want to make sure that they're hearing from me and that they understand that AEP, the parent or the service core is here to provide clearance and service and support for the individual operating companies. Really, that's the only reason the service core exists is to support the operating companies. And I need them to hear that from me. And more importantly, I just want to be a really good listener so that I can be really good at my job, so I can take care of our customers, take care of my team and then ultimately take care of my investors and the other stakeholders that are party to everything that we're doing here. So I don't want people to think that I'm stepping in the way or thinking that something is not right because that's not the case at all. I just want to make sure that we're doing everything we can to support the teams so that they can be as successful as they possibly can be. Because here's the other point, right? You called out the fact that there are pressure points as it relates to regulatory activities, I think that's going to be what we're dealing with for the next several years. We got a lot of headwinds now. The game's changed. The industry is going through a material transition each of our space is in a different place as it relates to their economies. And so I think everybody is doing their job. And that means we got to do ours too. We have been doing it, but we have to be really good listeners and learners and adjusters. And I think that goes for all the different stakeholders. So the more dialogue we can have, I think the smarter we're going to be. And if nothing else, that will -- we only be able to take care of the customer and make sure we're keeping the lights on and delivering this product that make life possible but I think we're going to be doing it in a much more effective way, and we're going to have to pick up the pace, too. So we've got to do it in a faster way than we've ever done it in our history. So I think it's exciting. I love getting out and talking with people. You guys know from the Street, I love getting out and talking to people, so that's not going to stop. So I just got to work my calendar, and I'll be out front, and I'm happy to talk about any of the conversations that I've had.

Got it. That's very helpful. And just one more along these lines dialing in a little bit more. In Kentucky, our local stakeholder conversations highlight a focus on increased distribution investment as a priority as opposed to the more recent, I guess, transmission investment, which could help local stakeholder relations there with a focus on distribution. Just wondering how your Kentucky strategy evolving over time here?

Yes. I'll tell you, let me start with this, again, having been a former CFO as well. I am at 1.6% ROE. Yes, we got to work on that. And that, to me, when I see that number, that's not a financially healthy, sustainably healthy entity. So that's why we're going through the case of activities. So we're going to work on that. And that's exactly why we went out and socialize the case well in advance with dozens of meetings with a variety of different stakeholders. So again, listening and learning, so we understand where everybody is kind of shaking out but also understanding what it is that we need to do so that we're successful not only in taking care of our customers, but making sure we're doing everything we can to make sure that the stakeholders understand what our objectives are and are comfortable with it. So yes, the objective is to, a, get a plan in place that will allow us to improve the financial positioning of the company, which then enables us to make future investments to take care of the customers. They need the power too. It doesn't matter which state you're sitting in, but the idea is to engage in these activities, hopefully have a really good case. And I don't expect it to be easy. It's not supposed to be easy. If it was easy, everybody would be doing it. So we'll engage in those activities and hopefully get us on a path forward that enables us to continue to invest in a really smart way in the state that everybody can feel good about.

Got it. So there's room to pivot towards more distribution over transmission. It sounds like you're working with stakeholders there?

Absolutely. And so those are the conversations that we're having. We do know that transmission has been very important to the commission. And so that is top of mind for us as well, and we work that into the structures that we've essentially set forth in our case. But at the end of the day, it's the distribution that also matters because we got to keep the lights on.

And next, we'll move to Anthony Crowdell with Mizuho.

Just -- first off, Slide 12. This maybe I've been following it too long, but I think over the last 10 years, the total debt to total capitalization has gone from 53%. Now it sits at 65%. I'm just wondering does that stabilize? Or where do you see the sweet spot for total debt to total capitalization?

Yes, absolutely. Thanks for the question. So it has inched up as you can see on the graph. I mean, 60% is our sweet spot, and that's what we're targeting going forward. As you can see, we're above that right now. We do expect that to decrease with the contract renewable sale proceeds and also the equity unit conversion. So that's a couple of hundred basis points that will reduce that closer to the [ 60%, ] but we still have some work to do.

Great. And then if I stayed on the balance sheet here, I think you've talked about your plan to be in a target, and I hope that's correct, in 2024. If I could get real granular. When do you think you're going to get into the midpoint of your 14% to 15% range? Is that something you talk about?

Yes. I mean I would say, we're going to be -- we say we're going to be in the target in 2024, and I think approaching the midpoint by the end of 2024. There are the fluctuations, as I mentioned, in FFO that we're experiencing, and that's just really due to timing of quarter-over-quarter fund flows. And so you will see, especially in 2023, that it will be depressed until the fourth quarter when we really see that [indiscernible] in the collateral collection and improving our FFO there. So that's what's going to take some time. But we do expect it to increase, materially by the fourth quarter and then into next year.

And Anthony, just to put a little finer point on it, to remember, our threshold that we're sensitive to is 13% as it relates to our Baa2 rating from Moody's, and so that's why we toggle to the 14% to 15% because what we want to have is cushion. So 14% definitely gives us some cushion. So keep that in mind as well. And the other thing I mentioned in my comments, too, is as we proceed through the rest of this year, you can expect maybe a little more pressure as we go through the next couple of months with some improvement as we get to the fourth quarter. Just want to manage those expectations.

Yes. The other thing just to highlight is that we're talking a lot about the timing of collateral payment. But 80% of that volatility that we're seeing relates to our retail business, which, as you know, is for sale. So once we sell that business, we would expect that reduction in volatility going forward.

And then just lastly, Julie, I appreciate all the commentary you've given on the regulatory strategy and especially Kentucky. And I know Kentucky is a very small piece. But when you look at the equalizer chart, I mean, the ROE is pretty low. What's a reasonable assumption for us to use where that ROE could go in by 2024. I mean does that go to an allowed of 9.9%. I'm just curious, how long does it take to recover the regulated returns of the utility?

Yes. Anthony, it is going to take a while. I do not expect a flash cut. And so remember, in our case, we requested a 9.9% ROE, our current authorized is 9.3%. I'm looking at Page 34 in the slide deck right now. It will be a walk. So that's something we're trying to manage our own expectations around as well as for you all as you work to model. So stay tuned and let's this case proceed and see how things move along and then we can continue to kind of dial that in and give you more direct guidance, okay.

And we go to Julien Dumoulin-Smith with Bank of America.

Maybe to follow up on some of the last few questions here, if I can. Just as you think about some of these headwinds here with respect to securitization heading into '24, obviously, you're down fairly confident, not just in offsetting the weather year-to-date, but in the '24 items here. Can you talk about some of those tailwinds here or some of the forthcoming offsets? What else gives you the confidence in having that linear trajectory on the 6% to 7% here. If you can speak to that a little bit more. And maybe related to that, can you talk about maybe the timing of some of these items to the extent which had some of those headwinds on securitization bleed into '25 as well? I don't want to be too myopic on the current, the next year.

Yes. No, I mean, what I'll do is I'll start with kind of addressing the 2023 earnings guidance question. If you look, we were $0.18 below prior year, and we guided to year-over-year for the full year, it's about $0.20 improvement. So that's $0.38 that we need to outperform last year for the second half of the year. When I look at this, I think it's helpful to break it down into components. So rather was $0.29 over 2022, about $0.20 of that impact is versus normal. And that's where we've taken some action to offset those headwinds. Interest also is about $0.29 unfavorable year-to-date. It's running a bit above expectations. We had guided to $0.20, but that also didn't include interest on Kentucky because we had expected to sell the business. So that's about $0.10 per year, and that's covered in revenues. So we had anticipated much of our year-over-year increase to be in the first half of the year because of the timing of the Fed action. So while we are a little bit short coming into the back half of the year, we also have the proceeds from the contracted renewable sale and equity unit conversion that will help reduce our debt somewhat and we've taken other actions to offset the increase in rates because it has been -- that has been tightening a little bit longer. When you look at O&M, unfavorable to last year in the first half, but we expect this to reverse due to timing of our O&M spending. Our original guidance plan for reduction of O&M during the second half of the year because last year's spending was a little bit robust on the O&M side in that half. And so we had already anticipated a reduction and then we've taken additional actions like those that I've mentioned to be able to make up for the reduction in weather volumes. And then lastly, there's a couple of other things that we're pointing to. One is the favorable trends in commercial load that we expect to continue, and we've also seen favorable results in our generation and marketing business that will benefit us this year. So putting that all together, that's what gives us the confidence in our ability to meet our earnings guidance for this year. In terms of the maintaining the 6% to 7% EPS growth going forward, it's really a story on our capital deployment, and we have a very robust capital pipeline that allows us to do just that.

And Julien on that note to kind of put an end cap on this. I think the core is solid. And so when you look out in the next 2 years, as Ann mentioned, we got $40 billion we're put into work in terms of capital investment over the next 5 years. We'll continue to work with our regulators to make sure that we're deploying the dollars where we all agree that they need to go. And then at that point, it's really around making sure that we also execute on some of the regulatory plans that we lay out there. But as you know, we've got some strategic asset sales that are underway. So we'll deal with the fact that some of those businesses are falling away, rechanneling those dollars to the regulated pieces of the business, that will help us from the math perspective and making sure that we're hitting all of those other balance sheet metrics that we need to make sure that we hit so people aren't worried or concerned and we got a little more flexibility. So when we have a weather event or something of that nature, we can easily sustain that. But the core is solid. And at this point, it's around being efficient, putting the dollars to work where it makes sense and closing the gap on the ROEs.

Got it. All right. Excellent. And then if I could follow up briefly on a couple of details. Just with respect to PSO, obviously, dynamic situation with the ALJ and settlement. Can you talk a little bit about your expectations here and maybe about what you've been planning an interim rates? Just ultimately what happens, how you've been planning, what's reflected in rates, if you don't mind a little bit of an update there?